What Is Wholesaling in Real Estate?

What Is Wholesaling in Real Estate?

Real estate wholesaling might be a good alternative if you want to attempt investing in real estate but don’t have a lot of capital to do so. Finding homes for sale, getting them under contract, and then locating a different buyer are all parts of the process of wholesale real estate. In exchange for bringing together the customer and seller, the wholesaler receives a commission when a deal is successful.

What does wholesale real estate entail?

Real estate wholesaling is one of the methods to get started in the field of real estate investing with the fewest barriers. A wholesaler, in the simplest terms, is a person who mediates a real estate transaction between a seller and a buyer. Without having to invest a lot of money upfront, obtain a license (in most jurisdictions), or deal with challenging issues like construction or DIY rehabbing, wholesalers who can enable a consistent stream of property sales can earn a sizable income.

Wholesalers frequently manage the sales of distressed properties, which are typically houses that are in default, being foreclosed upon, being sold as “real estate owned” (REO), or being sold in any other way to pay off a debt. The owners of these homes are eager to sell, frequently as soon as possible, but require assistance in locating interested buyers. Since homeowners who are experiencing severe financial difficulties are often unable to maintain a home in pristine condition, the houses are frequently in disrepair.

Wholesalers typically employ two techniques to finalize a deal:

BUYING, SELLING, OR “ASSIGNING” A CONTRACT: In assignment contract wholesaling, a seller agrees to put their home under contract for a predetermined price after being located by a wholesaler. The wholesaler then turns around and locates a buyer who is prepared to pay more than that sum, transfers (or “assigns”) the contract to that buyer, and retains the distinction as an assignment fee when the sale is completed.

A DOUBLE CLOSE: It is when a wholesaler purchases a piece of property with their own money (or a hard money loan) and then sells it to a customer. The distributor makes plans, though, so that their purchase and the buyer’s purchase happen at the same time. A wholesaler can only possess a property for a short period of time—a few days, perhaps even a few minutes—if a double close is timed properly. Since they are technically the seller, the wholesaler will profit directly from the sale in order to generate revenue.

Example of wholesale real estate

Here is an illustration of how assignment contract wholesalers operate:

A wholesaler first identifies a potential home seller. Let’s assume that the seller is asking $90,000 for their house. The wholesaler and the seller sign into a contract for a purchase, but the wholesaler does not really acquire the property. The wholesaler now looks to their networks to find a buyer prepared to pay more than $90,000 for the property despite having the legal right to do so thanks to the signed contract.

The wholesaler can sell the contract to a buyer who is willing to purchase the property for $100,000. The difference between the property’s purchase price of $10,000 and sale price of $90,000 is the wholesaler’s charge.

Wholesaling real estate, step by step

We’ll continue with assignment contract wholesaling for the purposes of this example because it’s the greatest method to enter the wholesale real estate market with no money, no license, and no credit requirement.

Find motivated vendors as the first step

In general, home sellers prefer to get the most money possible for their properties, even if doing so means the sale may take longer. However, as a wholesaler, you want to focus on a slightly different group of potential customers: homeowners who are eager to sell their properties as soon and easily as possible, even if it means negotiating a lesser price. You have some leeway to raise the price when you contact them later because to this discounted price.

Here are a few strategies for finding motivated sellers:

  • Look for properties that have recently come off the market or have been on the market for a while.
  • Look for houses that are unoccupied or abandoned.
  • Find homeowners who are in default, are in the process of losing their houses to foreclosure, or have liens or judgements against them by searching public records.
  • To discover homeowners who want to sell their houses quickly, use advertising techniques like direct mail, TV and radio commercials, or Facebook ads.

Make an offer in step two

You should carefully see the property before making an offer to the seller, or, if you’re out of the country and working electronically, get as much information as you can about it. This will help you determine the condition of the house. How much would someone need to spend on improvements or repairs to get a better return on their investment?

An offer from a wholesaler to a seller should take into account:

  • Repair fees
  • Costs of buyer’s holding
  • Closing fees
  • Final revenue for the buyer
  • Cost to the wholesaler

Sign an agreement is step three

Once you and the seller have reached an understanding, both of you will sign a purchase agreement, which gives you the right to buy the property at the agreed-upon price. In a conventional wholesaling deal, you are allowed to transfer the contract to a different buyer. You can get assistance from a real estate lawyer who works with investors and wholesalers to create a contract that complies with the rules in your state.

Find a buyer in step four and assign the contract

You will locate a buyer at this stage of the procedure who wants to purchase the home; frequently, this buyer will be a cash-rich real estate investor. Once a price has been agreed upon, you will use an assignment of contract to give them the contract. By assigning the contract, you are handing the buyer the authority to purchase the real estate for the agreed-upon sum. When you sell the buying rights, the wholesaler receives an assignment fee from the purchaser.

Before you get into a wholesale contract, it may be beneficial to compile a list of real estate investors looking to purchase distressed properties.

A contact list can be created using resources like:

  • Attending regional real estate gatherings
  • Attending online forums
  • Querying title firms about investors
  • Making contact with local landlords that are renting out properties
  • Going to real estate auctions to meet investors

The buyer completes the property transaction in step five

A title company and, occasionally, a real estate lawyer will be present at the closing in most cases. The closing is a deal between the buyer and the homeowner; wholesalers aren’t involved in it directly. Closing on a wholesale agreement, however, can be trickier than it would be for a regular home purchase because wholesaling also entails passing the contract from the wholesaler to the buyer.

The difficulties involved in the process of real estate wholesaling are not something every title company will be familiar with. Finding a title company that collaborates with wholesalers and real estate investors may facilitate a quicker and more efficient transaction.

Pros and drawbacks of real estate wholesaling

Pros

  • There is no credit check because you don’t require financing or cash to purchase a property.
  • In most states, a real estate license is not required.
  • Your small initial outlay lowers your risk in the real estate sale deal.
  • In the real estate industry, you can create a network.

Cons

  • If you’re competing in a tight market, it could be difficult for you to discover decent bargains.
  • Legal restrictions on how to advertise a property that you do not own must be followed.
  • Despite having less risk, you stand to lose more money than you would if you used house flipping or other real estate investment techniques.
  • If you don’t use the double-close approach, your assignment fee will be displayed in the closing disclosure for everyone to see.

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